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Many people are curious to know whether it is worthwhile topping up their state pension. After all, the full new state pension in 2021-22 can grant an individual up to £175.20 per week – or £9,110.40 per year, which is certainly not an amount to turn your nose up to. In this article, our financial planning team at Hanson Financial Services offers an overview of how the UK state pension works, some of the intricacies of topping it up and whether it’s worthwhile.
What’s so good about the state pension?
The state pension comes with a lot of attractive benefits which means that it will almost always feature within a retirement plan for someone residing in the UK. In fact, as many as 1/3 people in retirement rely solely on their state pension to support their lifestyle; not a great statistic, as it is better to have other savings and income streams too. With that said, there are many powerful aspects to the state pension which can make it worthwhile getting the best deal you can from it.
First of all, the income from your state pension is set to rise with inflation each year due to the “triple lock” system. This essentially means that the state pension must increase by the highest of earnings, prices or 2.5% – helping to ensure that the income retains its spending power into the future. This puts the state pension at a significant advantage over other investments which need to equal, or beat, inflation through their performance.
Secondly, your state pension income comes, ultimately, from UK government taxation – making it highly unlikely that it will ever run dry. With an investment portfolio, you need to manage things carefully to ensure that everything stays on track and you do not lose money. A state pension, however, is guaranteed for the rest of your life – even if you live into your 100s.
Topping up your state pension
Not everyone is entitled to receiving an income from the state when they retire. In 2021-22, the rules stipulate that you need at least 10 years’ of qualifying National Insurance Contributions (NICs) on your record to receive anything at all. To get the full, new state pension you need at least 35 of these years under your belt. For an employed person, you should pay automatically into the UK’s national insurance system under the PAYE system. Over your career, therefore, it is likely that many people will naturally accrue the necessary 35 years to get the best state pension deal. However, many do not. Perhaps someone takes a long career break to raise their children, for instance, and misses out on years – maybe decades – when they could have been building their NI record. Other people work for a long period overseas for a non-UK employer, which can result in a similar problem.
For people in this kind of position, it can be worth asking whether you should “top up” your state pension – i.e. by making voluntary contributions. Here, you look back over your NI record and identify “gaps” (incomplete years) where you either missed a year entirely, or did not quite put in enough to qualify it fully. You can then decide whether it’s worth paying a set amount now – say, £500 – to complete the year and secure a higher, guaranteed lifetime income in retirement.
As you can probably see we are suggesting, this is often a very good idea! However, it is crucial not to simply rush into doing so without running through some essential checks with a financial adviser. In particular, you should explore together whether any top-ups are truly necessary. For instance, you might still have enough years left to work and complete your 35 qualifying years. Suppose a 50-year-old is considering topping up their state pension, and they need 15 more qualifying years to complete their record. Since they likely will be unable to take the money any earlier than 67/68 (due to the rising state pension age), this person still has at least 17 years to keep working and build up the remaining years automatically by working. In this case, it may be a waste to make large voluntary contributions to top-up incomplete previous years (unless they were committed to retiring earlier in their 60s, for example).
Instead, in this case the money could be put into their pension pot or other investment account to increase the individual’s other income streams in retirement. Alternatively, the amount could be committed to clearing a cumbersome personal debt (e.g. a 19% credit card) or to overpay the mortgage, so you own it outright faster. There are many ways to improve your financial position in retirement and to improve your lifestyle. Speak to a financial adviser to make sure you take full advantage of the opportunities you may have in front of you.
Invitation
Are you interested in talking to a financial adviser about your pension and investment planning needs? We’d love to assist you here at Hanson Financial Services.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
You can call us on:
Liverpool Office: 0151 708 7616
Manchester Office: 0161 401 0991
Chester Office: 01244 960 039
Or email via: [email protected]
